The 10 poorest performers in the European Union bank stress tests have paid almost €20 billion in dividends since 2011, increasing the potential burden on bondholders and taxpayers should they fail, according to a new study.
The analysis found that bailed-out Royal Bank of Scotland, Allied Irish Banks and Bank of Ireland were the only ones out of the 34 publicly listed banks in the stress tests that paid no dividends for the financial years 2010-2015.
Adverse scenario
The latest tests did not include a pass/fail mark but showed that capital levels at two banks – Ireland's AIB and Italy's Monte dei Paschi di Siena – could dip below future regulatory minimums in an adverse scenario.
The tests also found that in the adverse scenario almost two-thirds of the 51 public and private banks tested risked a common equity tier one ratio below the 10 per cent mark typically demanded by investors.
The report’s authors – ZEW’s Sascha Steffen, NYU Stern’s Viral Acharya and University of Lausanne’s Diane Pierre – argue that the tests dramatically underestimate the actual capital shortfall at the banks, which they say could be as high as €900 billion based on a market measure of capital.
Sharply critical
In that context, they are sharply critical of the dividend payments, which amounted to about €170 billion across the 34 banks.
“Allowing undercapitalised banks to pay out dividends represents a substantial wealth transfer from subordinated bondholders to shareholders as it increases the likelihood that bondholders will need to be bailed in,” the authors wrote.
“Moreover, it is ultimately a wealth transfer from the taxpayer to the shareholders, as state aid is possible under the new restructuring rules after 8 per cent of equity and liabilities have been bailed in.”
They added that if European regulators had followed the US example of banning dividends at weaker banks, “the retained equity could have funded more than 50 per cent of the capital shortfalls we estimate in 2016”. – (Copyright The Financial Times Limited 2016)
